Elecon Engineering: Growth trajectory moderated

Elecon Engineering has announced third quarter results of financial year 2011-2012 (3QFY12). The company has reported 0.2% YoY decline in total income while net profits have declined by 58.6% YoY during the quarter. Here is our analysis of the results.

Performance summary

• Total income declines by 0.2% YoY in 3QFY12 due to execution issues.
• Operating profits decline by 1.8% YoY during the quarter due to increase in overall expenditure.
• Net profits declined 58.6% YoY due to fall in other income. In 3QFY11, the company realized a profit on gain on sale of investments to the tune of Rs 205.4 m. Adjusting for these non-recurring gains profits declined 6.4% YoY in 3QFY12.
• As of 31 January 2012 the unexecuted order backlog of the company stood at Rs 14.1 bn.
• Order inflow up to January 2012 was in the region of Rs 10.3 bn. The company currently has live enquiries to the tune of Rs 55 bn.
• Power sector contributes 67% to the order book, steel 6%, cements 12%, port 4%, and mining 5%.
• The company intends to incur a capex of Rs 700 to 800 m in FY12. Management expects topline growth to be in the region of 13-15% in the current fiscal.

Standalone performance snapshot

(Rs m)	3QFY11	3QFY12	Change	9MFY11	9MFY12	Change
Total income	3,018	3,012	-0.2%	8,278	8,953	8.1%
Expenditure	2,521	2,524	0.1%	7,003	7,520	7.4%
Operating profit (EBDITA)	497	488	-1.8%	1,275	1,433	12.4%
Operating profit margin (%)	16.5%	16.2%		15.4%	16.0%
Other income	205	-	-100.0%	210	4	-98.1%
Interest	123	143	15.6%	328	418	27.4%
Depreciation	98	107	8.6%	285	313	10.0%
Profit before tax	480	238	-50.4%	871	705	-19.1%
Tax	112	86	-23.2%	228	248	8.9%
Profit after tax/(loss)	368	152	-58.6%	644	457	-29.0%
Net profit margin (%)	12.2%	5.1%		7.8%	5.1%
No. of shares					92.9
Basic earnings per share (Rs)					4.9
P/E ratio (x)*					8.3

* On a trailing 12 months basis

What has driven performance in 3QFY11?

• Elecon's total income declined by 0.2% YoY during 3QFY12. Revenues (excluding inter-segment adjustments) from material handling equipment (MHE) were flat at 0.4% YoY and that from the transmission equipment (TE) business increased marginally by 3.5% YoY. Execution issues have impacted the topline growth, resulting in inventory build-up.
  Segment-wise performance

  (Rs m)	3QFY11	3QFY12	Change	9MFY11	9MFY12	Change
  Material Handling Equipment (MHE)
  Revenue	1,638	1,644	0.4%	4,739	4,991	5.3%
  % share	53.6%	52.8%		56.4%	54.3%
  PBIT margin	13.4%	12.5%		13.0%	13.1%
  Transmission Equipment (TE)
  Revenue	1,418	1,468	3.5%	3,665	4,198	14.5%
  % share	46.4%	47.2%		43.6%	45.7%
  PBIT margin	17.9%	14.9%		16.0%	14.6%
  Total
  Revenue*	3,056	3,112	1.9%	8,404	9,188	9.3%
  PBIT margin	15.5%	13.6%		14.3%	13.8%

  * Excluding inter-segment adjustments
  
• Operating margins contract 30 bps YoY mainly due to increase in staff and other expenses as a percentage of sales. The staff expenses (as a percentage of sales) increased from 4.8% in 3QFY11 to 6.3% in 3QFY12 while the other expenditure (as a percentage of sales) increased from 11.7% in 3QFY11 to 12.7% in 3QFY12.
  
• Net profits declined by 58.6% YoY. However, adjusting for the gains on sale of profits on investments in 3QFY11 net profits declined 6.4% YoY.

What to expect?

At the current price of Rs 63, the stock is trading at a multiple of 8.3 times its trailing twelve month earnings. Going forward, the outlook in other sectors namely cement, steel and ports is expected to remain muted due to lack of investments. Management expects order book to be in the region of Rs 15-16 bn by the year end. However, it has scaled down the revenue growth target to 13-15% due to the prevailing execution issues. Based on these factors and the current macro-environment we maintain our hold view on the stock.